Flipping A House

Flipping a house is the process by which an investor purchases a house with the money obtained from a low interest mortgage loan, then subsequently sells the house quickly for a profit and repays the mortgage loan before taxes and interest accumulate. Flipping houses caused the mortgage failure of 2007 through 2008 due to the high number of mortgage loans being written to unqualified investors in hopes that they could make profits flipping houses.
Basically mortgage companies got greedy. Instead of writing safe stable loans to people interested in buying homes for the purpose of living in them and paying down the mortgage, they came up with all types of fancy loan modifications so that no money was needed as a down payment on the house. This caused a flurry of investment into houses, driving up the housing prices and generating a large amount of money for everyone involved. The problem came when the only people that were buying houses were people investing money into house flipping. This drove the price up so much it wasn't worth it for people to purchase homes to live in because they were overpriced. When millions of mortgage loans by investors were defaulted on, the mortgage industry collapsed. And thus the mortgage meltdown.
Now is flipping a house entirely bad? No. There is money to be made in the real estate market and right about now with the impending stock market crash due to the European crisis, right now might be the perfect time to invest your money in houses. With the economy slowing down there will be more demand for rental residences and the concurrent receding of the housing market and the stock market will not be equal. The housing market will decline much less than the stock market, strictly because it was already battered so heavily and has not recovered like the stock market has. So my advice to you? Use all your money to buy up cheap houses and convert them into rentals for a couple of years to pay off the mortgage payments, then flip them for some real money in a year or two. It will definitely be worth it.

Fannie Mae and Freddie Mac

So I was sitting watching The Kudlow Report today and Kudlow stated something along the lines of, it isn't banks that are causing this financial crisis... It's Fannie Mae and Freddie Mac. Let me just set the record straight. It was NOT the fault of the government agencies designed to be providers of secure lending to underprivileged people. It was the shameful greed of America especially those on wall street, the government officials preaching deregulation, but most sadly the majority of the population who decided with all these fancy financial instruments I can live well above my means and hope that everything goes up a lot so in 15 years I can sell houses at a profit. It is ridiculous to think that people purchased so many loans that within two years they completely crashed our financial system, and yet nobody caught on. Anyway, I've digressed. I think with help Fannie Mae and Freddie Mac can conservatively recover and later down the line resume command of issuing loans to lower income citizens of the United States of America so we can have a working class.

Also, the housing market will recover but it will be on much lower income homes. I'd say houses you could build and sell to people for $50,000. When we figure out how to make living in a $50,000 home feasible and enjoyable then the housing market will recover to before bubble periods.

The Workings of Mortgages

Taking out a mortgage to finance the purchase of a home can be very confusing. There are lots of different types of loans to fit any financial situation, and to ensure you get the best one you must understand how mortgages work and which one you will be best with in the long rung.

The most traditional type of mortgage loan is called a fixed rate mortgage. A fixed rate mortgage is extremely defined from the start including a rate that stays constant through the duration of the loan, which makes every monthly payment exactly the same and thus predictable so you can plan financially around the mortgage payment. Along with a fixed rate the duration of the mortgage is also predetermined, usually for a length of fifteen to thirty years. These loans are nice because the payment does not change with rising or falling interest rates, and are easily managed as long as the amount of money borrowed is not too large in the first place. You can find more information about fixed rate mortgages in our Info Center.

The next type of mortgage we will discuss is known as an ARM, an adjustable rate mortgage. The difference between a fixed rate mortgage and an ARM is that as mortgage interest rates rise or fall in the country the rate associated with the ARM rises or falls as well. This can be beneficial or negative based on whether the rate at the time is rising or falling. When the rate of a loan becomes higher or lower the monthly payments adjust accordingly which can prove burdensome for people with less discretionary income. The problem comes that if an ARM rate becomes too high then it can be difficult to pay the monthly payment every month, subsequently causing people to default on their loans and loose their homes to foreclosure. If you are confident the rates in the market will stay low or not rise higher than you can afford an ARM could be great if the rates go lower.

Another type of mortgage for people with less than perfect credit is known as a sub prime mortgage. These are mortgage loans made to people who normally could not obtain a loan at the expense of a much higher interest rate. In order for lenders to take the chance on people who have previously had blemishes on their credit record they need to garnish a bigger reward for themselves in the end. Thus they charge a much higher interest to people with lower credit. Sub prime mortgage rates are largely based on what credit score the borrower has, as well as current financial situations.

The three other types of mortgages that are seen enough to be noted are Jumbo, Balloon, and Two-Step mortgages. These are just various twists on mortgages based on a person's financial situation and mortgage loan needs. A Jumbo loan happens when a person needs to borrow a larger amount of money than the limit on regular conforming loans set by Fannie Mae and Freddie Mac. The larger amount of money is borrowed usually at a higher interest rate. A Balloon loan is a loan that has a lower interest rate for the first couple of years than would normally be given to a person for the amount of the loan, but after the pre-decided period in which they receive a low rate they must pay off the principle or refinance. A Two-Step mortgage involves paying a fixed rate for a certain period of time, then readjusting the rate only once for the duration of the mortgage. All these types of mortgages are detailed more elsewhere in our learning center.

Basically these are the ways in which a person can finance the purchase of a house. They all have their ups and downs, some are better than others in various circumstances, but overall these are the typical ways in which mortgages are repaid in the current mortgage lending system.

What Is A Mortgage Rate?

A mortgage rate is what determines how much money the mortgage lender gets back overall for taking the risk of lending out a large amount of money. Rates often vary by loan type and amount of money, as well as personal credit score and current financial situation. Mortgage rates work by every year taking the percentage determined by the rate and then re-adding it to the loan total. So basically if you have a $100,000 loan, with a mortgage rate of 6%, the first year if no part of the loan was paid off, $6,000 would be added to the total. That is the most basic way to look at it. There are many different factors and variables that play into the amount of money added and total amount accrued but basically you can look at a mortgage rate as an amount added every year based on the value of the loan.

It is important to get a good mortgage rate in order to make lower monthly payments to easily be able to afford to repay the loan. Without shopping around and finding the most competitive rate a home buyer might potentially pay tens of thousands of dollars more by the end of the loan. In order to understand mortgage rates more, please use our mortgage info center to look at types of rates and how they apply to various loan types and amounts.